The City/County ReturnTaking the mystery out of the Portland/Multnomah business
tax
By Mark Clift

A recent Oregonian headline read "City Sues for Business
Taxes — Portland takes a no-holds-barred approach." The article
concerned a large tax bill being assessed to an attorney for failure
to file a City of Portland/Multnomah County ("Mult/PDX") tax
return. Each business owner with any activity in Multnomah County or
Portland needs to evaluate his or her risk exposure related to the metropolitan
area’s business taxes. This is particularly true for lawyers who have
offices outside of the city but come into the city to perform services
and do trial work.

Many attorneys and other professionals who come into the
Portland area to perform services are unaware that Multnomah County and
the City of Portland have business taxes that may require them to file
tax returns with the county and city.

Law firms with offices inside the county or city generally
know there is a filing requirement, but might not understand that they
may be able to pay taxes on less than 100 percent of their income.

Filing RequirementsIn the context of service providers, a potential taxpayer
is generally a self-employed individual or an entity (through activities
of its employees) performing services within Multnomah County or the
City of Portland.

There are several exemptions from filing, but there are
generally only two exemptions that would normally apply to a service
provider:

1. Gross Receipts under $25,000. This exemption applies
to individuals or entities that have total gross receipts of less than
$25,000 for any tax year. This exemption is based on total gross receipts everywhere, not
just gross receipts in the county or city.1 To qualify, the
taxpayer must file either an Initial or Annual Exemption Request form
with the county and city and provide substantiation that gross receipts
were less than $25,000. An entity would generally attach page 1 of its
federal tax return; a self-employed attorney would attach a copy of Schedule
C of Form 1040. This exemption form should be filed for each year in
which a taxpayer meets the exception.

2. De Minimus Activity. Personal services performed within
the county or city area are generally considered sufficient contact to
create the need to file a tax return. An exception to this general rule
applies when the business grosses less than $2,500 in personal service
income from the business activities within the county or city and there
are 10 or fewer business-related physical contacts within Multnomah County/City
of Portland within a 12-month tax year. If only a small portion of a
single income-producing activity (i.e., only a portion of the revenue
from a contract for legal services) is performed within Multnomah County
or the City of Portland, that activity may also be "de minimus" if
it meets the above requirements.

So if an attorney or firm performs legal services in Multnomah
County and/or the City of Portland on anything but a very limited and
exceptional basis, and has total gross receipts of more than $25,000,
the attorney is required to file an annual return. There is a minimum
fee of $100 per year due with the City of Portland tax return.

It should be noted that both the City of Portland and Multnomah
County taxes are filed using a single form, but the income is apportioned
(see below), and the tax and fee liabilities are computed separately.
As a result of filing the "Mult/PDX" return, the city will
issue the taxpayer a business license.

Apportionment of IncomeService providers who perform services both within and
outside of the pertinent metropolitan area can apportion income and pay
taxes only on the portion of their computed income apportioned to Multnomah
County and City of Portland. Apportionment of income2 is done
by applying a ratio based on gross receipts in county and city divided
by total gross receipts everywhere times computed taxable income. For
example, if the gross receipts in the county and city were $100,000 and
the total gross receipts were $500,000, the apportionment percentage
would be 20 percent ($100,000/$500,000). If the computed taxable income
were $260,000, then the Multnomah County/City of Portland apportioned
taxable income would be $52,000 ($260,000 x 20 percent).

To compute the apportionment percentage you must be able
to determine gross receipts attributable to "Mult/PDX." Service
revenue is apportioned based on the underlying cost of producing that
revenue. To determine the source of the activities that give rise to
the revenue, you must review the total costs associated with generating
that revenue and then use those relative costs within and without the
county and city to proportionately separate the revenue into "Mult/PDX" and
non-"Mult/PDX" revenue. Note that the revenue generated could
be $100,000, but the actual costs could be more or less than the
amount billed. This can be very important in a contingent fee case where
there may be no direct relationship between the revenue and the underlying
costs — the total costs of bringing the case to trial could be much higher
or lower than the revenue received by the attorney.

The bulk of costs in any billing are associated with professional
time billed to the contract. You must determine what portion of professional
fee costs are generated within the county and city. Time records must
be kept to determine where the services were performed. There is no other
effective way to determine where to apportion these costs. The time evaluated
in this analysis should be direct time charged to a contract, and not
indirect time.

The hours worked within and outside of Multnomah County
or the City of Portland need to be determined for each person’s time
in the contract. Then those hours are multiplied by the billing rate
of that person to determine the underlying costs associated with the
revenue. A person’s billing rate is generally the best measure of the
underlying costs. The administrative rule associated with apportionment
only discusses the cost of service and does not provide a method of apportionment
except based on hours worked; however, discussions with county and city
auditors confirm that for attorneys, multiplying the billing rate by
the hours worked is an appropriate way to determine the cost of service.

Other costs in the contract should be analyzed to determine
where those costs should be apportioned. If these additional costs are
substantial, they could be used in addition to costs associated with
the costs of professional time to determine the underlying costs of generating
the income. Costs such as copying and various other direct costs that
are billed to a client would normally be apportioned to the location
of the law office where the costs were incurred.

If an attorney or firm reports revenue as net of "recovered
costs" billed through directly to a client, those recovered costs
would not be analyzed to determine the source of the revenue (since they
were included in gross billings, but then gross billings are reduced
by recovered costs to determine revenues).

Once the above analysis has been performed to source the
underlying costs, you can apportion the revenue.

Determining the Apportionment RatioOnce you have determined the source of the revenue, there
are two ways to determine the apportionment ratio. You may choose the
method which results in the lowest potential tax liability.

1. Hourly Method. This method allows you to log each hour
of service provided within the taxable area (see discussion about timekeeping
below in the Taxable Area discussion). Total gross income is apportioned
to the taxable area by multiplying total gross income generated during
the year by the ratio of the cost of hours of service (hours times billing
rates) performed within the taxable area to total cost of hours of service
performed during the year.

Example: During the current year Law Firm X has two attorneys,
Linda and Steve. The attorneys perform services both inside and outside
the taxable area. Linda has a billing rate of $260, while Steve’s billing
rate is $230. Each of the attorneys should prepare a daily log showing
total hours worked and total hours worked within the taxable area. At
the end of the year, the following hours were worked and the cost of
service (COS) was determined (see table).

Since 70 percent of the cost of service ($720,300/$1,029,000)
was related to services performed within the taxable area, 70 percent
of the revenue would be apportioned to the county and city. Total gross
income is then apportioned to the taxable area by multiplying total gross
income by the ratio determined above. Assume that Law Firm X generated
$1,000,000 of gross revenue during the year. Gross income apportioned
to the taxable area would be $700,000 ($1,000,000 x 70 percent).

2. Project-by-Project Method. Revenues from services can
be analyzed on a project-by-project basis to determine where the services
were performed. Revenue is analyzed using the cost-of-service approach
(see Method 1), but the analysis is completed on a client-by-client or
project-by-project basis.

*If services are performed completely within a taxable
area, all income from that client should be apportioned to the taxable
area.

*If services are performed both inside and outside the
taxable area and more services are performed inside the taxable area
than outside the taxable area, then all services are deemed to occur
inside the taxable area and all income from that client should be apportioned
to the taxable area.

*If services are performed both inside and outside the
taxable area and fewer services are performed inside the taxable area
than outside the taxable area, then all services are deemed to occur
outside the taxable area and none of the income from that client should
be apportioned to the taxable area.

*If services are performed completely outside a taxable
area, none of the income from that client should be apportioned to the
taxable area.

Example: Law Firm Y performs services in Salem with a cost
of service of $40,000 (outside the taxable area) and a cost of service
of $50,000 in the City of Portland for one particular client. Income
received from that client will be 100 percent apportioned to the City
of Portland (and Multnomah County), because more of the cost of service
was performed for the client inside the taxable area ($50,000) than outside
the taxable area ($40,000). (Conversely, if the numbers were reversed,
none of the income would be apportioned to the county and city, because
more of the cost of service for the client would be outside the taxable
area than inside.)

Note that it is possible to have zero apportionable income
to the county or city using this method, but the firm would still be
required to file a business tax return and pay the $100 minimum fee since
it was doing business in there.

Recordkeeping & Taxable Area — Boundaries by Zip
CodeAll services performed within Multnomah County are not
necessarily within the City of Portland, so you must
keep separate records for each. You would want to keep the process as
simple as possible. For
example, if your office were in the City of Portland,
you would generally only be concerned about time outside of the city.
So the easiest recordkeeping
system would be to have a separate code for Multnomah
County (in the county but not in the city) and another separate code
for "Oregon" (for
Oregon, but outside of both the City of Portland and Multnomah County).
Any time entry without a special location code would be considered to
have occurred in the office and within the taxable area. If you are doing
business in other states you need to track time in those states to appropriately
deal with those states’ tax requirements. For example, you need to track
time spent in the state of Washington so you can file Business and Occupation
(B &O) tax returns.

Most taxpayers use zip codes to determine whether goods
and/or services were provided within or outside the taxable area. The
City of Portland website provides a schedule of zip codes for the City
of Portland and Multnomah County at: www.portlandonline.com/licenses.
The zip code screen can be found by clicking on the "BL/MCBIT" tab,
then select the "Zip Codes — in City" or "Zip Codes — in
County" links.

How to Start FilingIf you have failed to file in the past and want to correct
delinquent filings prior to an audit, then you generally have two choices.

1. Voluntary Compliance Policy. A compliance policy allows
you to bring your filing requirements current by filing for either: 1)
the current year and the preceding three years; or 2) the current year
and all prior years. Based upon which of the two options you choose,
the penalties may be waived or reduced for tax years of returns filed.
You cannot enter the voluntary compliance program if you have filed returns
or if you have received a notice from the county or city. To get more
information on this policy, go to www.portlandonline. com/licenses, Home
header and click on the Voluntary Compliance Policy link on the right-hand
side of the webpage.

2. Start filing with the current year. Instead of making
up past filings, you could file an application and start filing with
the current year. The problem with this approach is that you have to
state on the application when you started doing business in Multnomah
County and the City of Portland. If you state that you started doing
business in a prior year, you are potentially liable for taxes and penalties
for all prior years. If you state that you began doing business in the
current year and the taxing authorities determine that this statement
is incorrect, you may be liable for past taxes and penalties. Note: You
cannot use the voluntary compliance policy program once you file a regular
application.

If you just started performing services in the county and/or
city this year, go to www.portlandonline.com/licenses
and select the BL/MCBIT header, and then the link to
Forms, Applications and Renewals.